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At a daily run rate of 2 lakh infections, and with the worst of the pandemic not over, the pace of the recovery is under threat. While only half the factories in Maharashtra are expected to remain shut for the next fortnight, more industrial enterprises could be shuttered as healthcare facilities break down.
Even before the surge of the last ten days, the growth momentum was slowing. Freight traffic, which had been holding up relatively well until end-March, started weakening in April. Sales of two-wheelers remain weak, loan growth that was languishing at multi-year lows has slipped below 6%, and consumption of diesel has been falling. Factory output for February contracted sharply, and after hitting 99.3 in end-February, the NIBRI—Nomura’s business resumption index—has been falling. In fact, the wholesale despatches of two-wheelers in March were smaller than the levels in March 2019; for commercial vehicles, the volumes were even smaller. Pranjul Bhandari, chief economist, India, HSBC Securities and Capital Markets, points out that the HSBC recovery tracker has fallen six percentage points between February and April, led by falling mobility and fewer e-way bills generated.
A few more curfews, like in Delhi, with all shops and malls shut, and the damage could be a lot more severe. Even without the curbs, the fear of infection at a time when there is a shortage of oxygen, hospital beds and remdesivir will keep people away from public places. Business in the June and September quarters would depend on the pace of the vaccination rollout, which unfortunately has been very slow. There could be a growth loss of about 100 bps in the June quarter. And although the recovery should gather momentum in the second half of the year, it is possible the economy, at the end of March 2022, will still be smaller than it was at the end of March 2020.
While larger companies and businesses operating in areas like retail, transport, hospitality and aviation will no doubt be the worst impacted, it is the informal economy that will, once again, bear the brunt of the pain. As we saw, for the nine months to December, the sum of the ebitda and wages—a proxy for GVA—of listed companies grew by about 6.5%. In sharp contrast, India’s non-agri GVA fell 11.6%, suggesting that smaller enterprises, primarily in the informal sector, are still struggling. The story of how stronger and bigger companies are taking away market-share from smaller enterprises will continue to play out. The corporate sector is building on the gains from government’s ill-advised and sharp cut in the corporation tax in September 2019; it now looks like the formal economy will become stronger even as the informal economy weakens with thousands of small enterprises dying.
Corporate profits are also getting a boost from the huge cost-cuts, but that is hurting the larger economy. In the September 2020 quarter, total expenditure for a sample of 2,334 companies (excluding banks and financials) fell 15% year-on-year (y-o-y), while net sales were down 8% y-o-y. In the December 2020 quarter, total expenditure fell 4% y-o-y while sales were up 0.25% y-o-y for a univese of 2,447 companies. To be sure, some of this was due to the drop in raw material costs, but even other expenses, including those on the workforce, were pruned.
The labour force participation rate dipped marginally to 40% for the week ending April 11, from 41.2% in the previous two weeks. Unemployment has climbed from 6.7% in mid-March to 8.6% in mid-April. The situation was discomforting even before the second wave struck. In the year to March 2021, the number of people employed was less by about 5.4 million, at 398 million, according to CMIE. Mahesh Vyas, founder of CMIE, has pointed out that, employment in agriculture in March 2021 was nearly 9 million higher than it was in 2019-20, implying an 8% increase in labour in agriculture and a fall in productivity. Vyas also highlights the fact that salaried employees have been among the biggest losers; close to 10 million jobs have been lost over the past year. The hiring outlook at IT giants like TCS and Infosys is heartening, but except for the IT and e-commerce spaces, not too many other sectors are adding to their workforces as automation and digitisation take over.
The private sector has made some big investments over the past three years—especially via the IBC route; while these may not have resulted in new jobs being created, existing jobs have been protected. Private sector investments are seen to be bottoming out with capex being made in sectors such as water and green energy and even in traditional sectors such as steel, but to what extent these will generate new jobs is not clear. Data from CMIE shows new project starts have increased in the March quarter but remain weak in absolute terms; since about a third of the existing capacity remains unutilised investments may stay slow for another two quarters. The services sector was already lagging the recovery in other sectors and will slow down further now; most sub-segments will probably not recover before September when the festive season sets in and the pent-up demand surfaces. In the absence of relief measures, large swathes of the population will be in distress. The second scourge is here.
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